The textile and clothing (T&C) industry has always been an opportunity for developing countries to industrialisation with low-value-added goods. Since the industry requires a lot of labour, it favours well in a population with a large number of mostly unskilled workers, women and children. Until recently, it had remained the only major manufacturing industry not subjected to the General Agreement on Tariffs and Trade (GATT) agreement. In place of these rules, it was subjected to the application of quotas known as Multi-fibre Arrangement (MFA) by the importing countries, Appelbaum, R. (2004).
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The quota system started with the Long-Term Agreement (LTA), putting international trade in cotton textiles under the general GATT agreement in 1962. It was only in 1974 that LTA was extended to cover other materials beyond cotton and thus became to be known as the Multi-Fibre Agreement (MFA). After negotiations with Uruguay, it was agreed that those countries that wished to retain quotas would have to commit themselves to phase them out in a ten-year period gradually. MFA came to an end in 2005, with the last quota being lifted on 1 January 2005. Since then, this has significantly changed international trade worldwide as well as having the sector restructured.
Effect of the protectionists’ multi-fibre agreement on developing countries like China
Phasing out of MFA implies changes in the employment sector as a result of both negative and positive production shifts. To minimise the social cost of adjustment, a faster adjustment of production should be coupled both to the passive and active labour market policies during the transition period. It is at this time that it would be necessary to coordinate industrial and trade policies with the labour market policies. In some extreme cases, the affected countries may completely lose production and thus are left with no option but to look for other sectors of specialisation, thus, ends up diversifying the economy, Institut Français de la Mode, (2004).
Mauritius is an example of the countries that applied diversification successfully, and this is a good example to the smaller Central American countries as well as African countries. Part of the international community and other developing countries that have benefited from the new rules in T&C carry with them the responsibility of helping the disadvantaged countries. This assistance will apply mostly to those countries that lack sufficient financial and technical potentials to adjust. Trade privileges to these disadvantaged countries could be applied in other sectors of trade as a means of restructuring. With these kinds of measures, future trade conflicts could be avoided and social hardship reduced. Thus, a more equitable share of benefits in T&C trade could then result.
Some countries fear that cheap clothing and textile could flood their market and thus threaten the domestic market that may not be prepared for the challenge of competition. Other countries are looking for new export opportunities due to the newly introduced free quota trade environment, while others will lose their preferential entry into the US and EU markets, thus having to deal with the difficult completion of exporting to these countries. Some of the quick to adjust countries will be able to maintain their market by adjusting successfully to the new challenges, while others will have to abandon theirs all completely and specialise in other fields.
Currently, the textile and clothing industry has evolved into more of an open market that is subjected to stronger quality and price competition. Some of the high-cost producers who survived under the ATC regime now are facing the difficulty of maintaining their position.
To achieve cost reductions, companies are being forced to reorganise because of the intense price competition, with the worker being on the negative receiving end to this as in most cases there is a general reduction in working conditions and wages. Although the producers aim at short term advantage of increased market share, this trend has some direct benefits to the consumers due to the reduced prices. Increased depletion in labour conditions and wages may be a disadvantage to some workers while others still will be able to find a better paying job within the T&C industry, Kyvik Nord and Hildegunn., (2004).
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As a means of achieving certain developmental outcomes, qualitative restrictions on imports have been utilised in international trade. This is a form of shield against foreign competition to the local industry. If foreign goods were allowed to enter the market freely, the competition would be high in the local market. Quotas special characteristic is that they restrict foreign goods competition irrespective of the price. Thus, quotas remove foreign supplier’s incentive to be able to compete on price.
Early trade measures that affected the textile and clothing sector in the United States were agricultural policies that restricted cotton importation. The US later had a bilateral agreement with Japan that limited its export of textiles to the US for a number of years. Europe exercised more restrictions than the US as they covered both the textile and clothing sectors.
Agreement to phase out MFA quotas
Agreement on Textiles and Clothing (ATC) initiated a formal process that saw the removal of global quotas on clothing and textiles. Although WTO Agreement was binding to all the state members, the practical implementation of the agreement was not always as per the theoretical prescriptions. Four stages were set by the quota liberalisation schedule. The first stage took three years, the second one four years, and the third one took three years. The first one between 1995 and the end of 1997 saw quantitative restrictions removed from the minimum of 16% of imports that was then followed by minimum batches of 17%, 18% and 49% in the remaining categories.
A slow pace of implementation
The pace at which this trade liberalisation took place was much slower than theoretically planned. This was expected as the key quota imposing countries (US, EU, Norway and Canada) had not lifted any quota by the end of 1997, which was the end of the first ATC stage. There were business reasons for this as most of them were driven by the fore-sight that a negative effect will be felt in the quota imposing countries with rapid trade liberalisation.
Despite the ATC guiding principles, its flexibility was fully exploited. Products that had not been previously restricted by the quota system were also included in the ATC. Their inclusion gave a good loophole for the large importing countries to integrate those other products first. An example is the Oxfam report that indicated that up to 37% of the products included in the ATC list were never restricted by the USA while EU pseudo-integrated previously unrestricted items in 1995 such as typewriter ribbons, parachute parts and dolls’ cloths. It’s only Norway that made rapid progress in integrating the textile and clothing trade under the ATC, Hightower, Neil., (2004).
Objectives of quantitative restrictions
Import tariffs have been used to raise the cost of imported goods. These tariffs are usually calculated on an ad valorem (percentage of value) basis or in some quantitative denominator form such as surface area, volume, weight or unit. These two forms could either be used singly or combined. Tariffs thus provide a partial protection measure that depends on the denominator in use. They also serve as means of collecting revenue beyond enhancing the competitiveness of the local product.
In situations where local firms are still not protected by the tariffs system due to the low cost of the imported products, even when the tariff is added, the quota system is applied, Krugman, P., (1979).
The textile and clothing sector is an example of an industry that has some of the major producing countries that enjoy cheap labour and thus supply cheap products even when the tariff is added. The result is that the quota system was introduced which;
- Are not susceptible to any (declining) price movements in the price of foreign-produced goods;
- Provide an absolute measure of protection to local producers in that they limit physical quantities of imports;
- Provide immune to movements in the exchange rate, for example, where the devaluation of a foreign currency may make that country’s products more competitive in the domestic market;
- On textiles and clothing are usually set individually against specific countries and on specific products and are thus particularly effective in shielding local producers from specific foreign competition;
- On textiles and clothing, they do not fall under countries’ binding commitments vis-à-vis the reduction in tariffs on industrial goods;
- Negate foreign subsidies impact by lowering the price of a foreign commodity.
Quotas also have the advantage of ensuring the orderly functioning of the general market. Irrespective of variables such as logistics problems, exchange rate movements and even foreign supply interruptions, the domestic market ensures a steady supply.
Unfortunately, consumer welfare is also lost since restrictions on cheap foreign products means that the domestic consumers will have to pay more for the local products. In the textile and clothing trade, the quota system has had both intended as well as unintended far-reaching effects. Although it has enhanced the orderly running of the market, a significant impact has been felt by the consumer in both quota-constrained countries and quota-imposing countries, Lankes, H.P., (2002).
Textile and clothing trade in the developing world
One of the noticeable outcomes is the protection of production centres in the quota imposing countries, mainly Europe and the United States. MFA slowed production as well as export from East and South-East Asian countries and enhanced growth of the sector in the industrialised countries. Between 1990 to 2003, textile and export increased from USD 212m to USD 395m. This represented a 4-5 % annual growth and an increase of approximately 86%.
Developing countries form the leading category of exporters, with China in the lead. Much of the European Union exports take place within Europe. The textile market dominance of China was obvious by the year 2003, even without taking into consideration Hong Kong re-exports.
Due to the fears of the end of the protectionist quota system, initiatives such as the ‘Istanbul Declaration’ were put forth. Although the US and the EU continued to resist the extension of the quota system, imports from China continued to increase following the textile and clothing trade opening.
Economic analysis on the costs of EU trade restraints on textile and clothing trade has been done in different research. It was estimated that by 1997, EU consumers were to pay roughly ECU 12 billion. If the complete integration had occurred by 31 December 1997 through the acceleration of the implementation process, EU consumers would have gained approximately ECU 25 billion per year this including indirect effects. Of these gains, approximately ECU 6.5 billion would have been from ATC quota rents recapture, Gatt, (1986).
Other gains could be traced to the reallocation of resources in areas that have higher opportunity costs and also from increased investments. It was estimated that from a full 1997 implementation, over EU 160 billion discounted gains would have been felt. The delayed implementation gains can also be traced also in the cost of saving jobs. It was estimated that this was equivalent to ECU 41 thousand and ECU 28 thousand in the clothing and textile industries, respectively, per year. When these values are re-calculated as per the EU family of four based on ECU 12.3 billion from loss inefficiency and ECU 12.7 billion for consumers from the accelerated implementation, average gains of about ECU 270 per year is got.
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Phasing out of MFA meant a reduction of distortions to trade in clothing and textiles hence more transparency, although this was still hampered by the re-installation of safeguard measures by the EU and the USA. Tariffs combined with other non-tariff trade barriers, e.g. eco-labels, have now become a major trade obstacle for the exporting countries. The end of MFA has reshaped the T& C industry, especially in terms of production, trade, employment, thus, creating new business opportunities but also introducing new social and economic threats.
Textiles and clothing are low-value goods that are less sophisticated. Being labour-intensive, they need a large number of unskilled workers. As a result of the rationalisation and consolidation process, there has been a decline in employment. Some of the OECD have pulled out of the market or are surviving with difficulty while South Asia and the South-East have increased their exports. It can also be observed that new markets have emerged due to preferential access to the rich markets.
Some of these new producers are in Central America and Africa. Worldwide employment in clothing and textile is of great importance, especially, China, Pakistan, India and Bangladesh. Developing countries such as Mauritius, Cambodia and Madagascar also rely on T&C employment to a high degree, Gereffi, G (1994).
Phasing out of some countries in the T & C trade and the coming in of new producers imply a noticeable change in the worldwide trade structure that has led to an employment shift and strong output in and between different countries. Based on these observations and the cheap labour market from countries such as China and Pakistan, they may eventually be the biggest winners. Some other countries such as Thailand, Bangladesh and Cambodia may be slight losers if they fail to apply the right policies.
Such strategies as modernisation and restructuring of their production, creation of enterprise and political alliances with other countries and leading companies, as well as integration into the global production systems, cannot be avoided by these small countries. These countries have the advantage of a good transport network and cheap labour, which they could use to their advantage. Alternatively, they can even merge their domestic production with the production systems of those countries that are successful within their region.
Loser countries form the third category. These are the countries. which may lose a part or even a large part of their T & C industry but still survive in niches due to the restructuring strategies that they apply or due to the geographical advantage. Examples are countries like Mexico and the Central American States that benefit due to their proximity to the US. Germany falls in this category due to the restructuring strategy that has seen it produce high-quality products ready to face high global competition. Turkey, Egypt and Morocco are some of those countries that are benefiting due to their proximity to the EU market, Cortes Claudia Imenez (1997).
The fourth category is countries that eventually lost out completely from T & C trade and have got thus to find other industrial sectors to specialise in. Madagascar is a country example that falls in this group.
Advantages and disadvantages of free textile trade to the European Union
On-going liberalisation and globalisation expose the EU industry to competition from low labour cost countries such as Asia. Although there is a huge labour cost difference between other countries, especially Asia, the EU industry has remained competitive because of high productivity and incorporation of competitive strengths such as quality, innovation, creativity, fashion and design. Although at the home market, the EU countries are faced with intense competition, most of the export markets remain nearly closed due to the tariff as well as non-tariff barriers. It is worth noting that the EU textile and clothing industry managed a 17.4% export of its turnover in 1999. This put it in the second position after China as the largest world exporter of textile and clothing, Bhala Raj (2001).
Recently, access to the world market has topped the world community policies. Global trade in textiles and clothing should be in both directions as per what is generally accepted. It is thus a mutual market where countries willing to enter into the EU market must, in turn, be willing to have their market liberalised.
In order to abolish barriers and thus create a free access market, the EU monitors its trading partners on their compliance with the trade policies. The past has shown that some trading partners infringe the discipline and rules by engaging in unhealthy competition. An example is the Uruguay Round, which has enabled the commission to wrap up anti dumping cases quickly.
Hong Kong’s clothing and textile exports to the EU had previously been under the World Trade Organization (WTO) agreement on ATC up to 1 January 2005 like it was with Chinese mainland export to the EU market. But EU has continued to have safeguard quotas on Chinese textile products in ten different categories. Since this EU-china agreement was for a period between 2005 to 2007, full liberalisation is expected this year, 2008.
The United States, as well as the European Union, being the original architects and beneficiaries of textile and clothing quotas, have moved in to counter the effect of China’s export. Although the EU approach is seen as coming from the bilateral agreement with China, the effect of both moves, either from the US or the EU, eventually has the same effect. China has recently turned to be the primary point of focus when it comes to quantitative restrictions. It is worth noting that available safeguard measures for the countries under WTO rules have been foregone more so to be in favour of the remedies found in China WTO Accession Agreement, Appelbaum, Richard (2004).
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